Retail Stocks: Ready for a Purge?

By Ben Levisohn

Guggenheim’s John Heinbockel and team argue that a “purging of space is necessary” in retail, and recommend hiding in “industry leaders who can profitably gain share and are not especially expensive,” like Michaels (MIK), Tractor Supply (TSCO), Restoration Hardware (RH), Kroger (KR), and US Foods Holding (USFD). They explain:

Reuters

The dichotomy between solid macro date points–nominal spending and retail sales growth of 3.5%-4.0%—and uninspiring micro results—almost no retailer comping above 5%—is easily explained by two factors. One, the ongoing crowding out of goods’ consumption by services… [Spending] on services is growing 2-3x that of spending on goods, 4.5-5.0% versus 1.5-2.0%. Two, the impact of substantial brick & mortar capacity, especially in an environment with rising e-commerce penetration. This is the “tragedy of the commons.” There is too much improved capacity chasing too few sales dollars, making it hard for any one retailer to profitably grow. A significant purging of space is necessary but most are waiting for the other guy to do it. In this context, we like industry leaders who can profitably gain share and are not especially expensive, like Michaels, Tractor Supply, Restoration Hardware, Kroger, and US Foods Holding.

Shares of Michaels have fallen 0.9% to $24 at 3:02 p.m. today, while Tractor Supply has declined 0.4% to $83.91, Restoration Hardware have dropped 1.4% to $33.49, Kroger has slipped 0.6% to $31.98, and US Foods Holding is off 0.2% at $24.15.

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AUGUST 31, 2016 11:04 P.M.

mark hallada wrote:

There is only one retail stock worth buying " Under Armour .....the most comfortable uniquely designed clothes out there for All Seasons.....worn by every College athlete, every NFL player and every person for daily casual wear "

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Earnings reports, corporate strategies and analyst insights are all part of what moves stocks, and they’re all covered by the Stocks to Watch blog. We also look at macro issues, investor sentiments and hidden trends that are affecting the market. Stocks to Watch gives you the full picture of the U.S. stock markets, all day long.

The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.